Accounting for Transaction Processing Fees

When a company accepts payment by credit card, the company incurs a transaction processing fee from a payment processing network (Visa, MasterCard, etc.). Thus, if a customer makes a $100 purchase, the company won't receive the full $100 due to the transaction processing fee.
Transaction processing fees (aka credit card fees or payment processing fees) are an operating expense and not a reduction of sales revenue. Thus, if a company accepts a credit card as payment for a $100 purchase, and the company is charged a transaction processing fee of 3%, the company would increase its cash account by $97, record a $3 expense, and record $100 of sales revenue.
Some companies apply a surcharge to transactions in which the customer pays with a credit card (to recoup the cost of the payment processing fees). If a company does assess a surcharge, this would increase the amount of cash received by the company (since it is collecting the surcharge) and increase the company's revenue.
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[@Mastashredda7]

Makes sense, thanks Ed

[@peterhans8905]

Hello Edspira, could you make some videos about Financial Due Diligence work that is being done in Transaction Services? Some practical examples would help a lot! Kind regards

[@ontarioreignfan]

In your example why would sales revenue be $103 instead of $100? The additional $3 is an administrative fee/processing fee and is only charged if paying by credit card and would not be charged if customer paid by cash. The sale of the product/service should be $100 regardless of the method of payment. Plus by including the $3 in the sales revenue wouldn’t that skew your gross margin?
My take would be that there would no merchant fee expense since the $3 charged by the credit card company is being passed onto and paid by the customer. So ultimately there is no $3 fee incurred by the company. It’s a wash.
I believe the journal entry is incorrect as well. Should be:
Cash 103
Merchant Fee Expense 3
Sales Revenue 100
Then when the company pays the $3 credit card fee the JE entry would be:
Merchant Fee Expense 3
Cash 3
Therefore a wash.
In your JE you represent that the company is receiving $100 when they are actually receiving $103 ($100 product/service sale + $3 credit card charge).

[@Edspira]

I see the logic of what you are saying, and both our approaches arrive at the same net income. My main issue with your approach is that it appears as if the company didn't incur any merchant fee expense, when the company did in fact incur this expense; the company just increased the price it charged to the customer to cover the expense. The surcharge can be viewed as a way to charge different prices to different customers based on whether they pay with a credit card; thus, if a customer chooses to pay with a credit card, the company charges them a higher price and thus records higher sales revenue. Now if the company's accountant thinks it would be more helpful to record the surcharge as "other revenue" and not sales revenue, I agree that this could be helpful in terms of tracking the revenue generated by the surcharge (and it would also address your point about the effect on the gross margin). But based on my research of the ASC in the U.S. the FASB a clear accounting treatment for this situation (this might be different outside the U.S.).

[@ontarioreignfan]

@@Edspira So if I took the approach that I outlined in my initial reply would that be considered a departure from GAAP?
So if I did it the way that I’m thinking an outside auditor would more than likely reclass my entries to the way you’re suggesting?

[@Edspira]

Based on my research there isn't a clear position of U.S. GAAP on how this situation should be treated. Thus, I think there is room for diversity in practice. I can't say how an outside auditor would react to your position and I'm not saying you are wrong. I'm just saying the ASC doesn't clearly outline how to account for this scenario (based on the research I've conducted - feel free to cite authoritative literature showing otherwise) and that in my opinion it would be helpful to see that an expense was incurred and that revenue was generated (thereby offsetting each other).

[@ontarioreignfan]

@@Edspira Thank you for responding. Very much appreciate your insight.